U.S. CPI: Lowest since 1954 – deflation here we come

The United States Department of Labor released its monthly data on inflation today at 8:30AM. The data showed that inflation rose only 0.1% over the last year, the lowest reading since 1954. I should note that oil and food prices continue to fall. Combine this with slow consumer demand which will feed through into consumer prices and you have deflation by next month.

While we should welcome lower prices, we should be aware that they are due entirely to falling demand and excess supply; that is a world of difference to deflation from productivity gains. This is the environment of depressions. The economy is looking more and more like the 1930s every day.

Consumer prices fell by a slightly smaller-than-expected margin in December, according to government data on Friday that showed a sagging economy was exerting downward pressure on prices and raising the specter of deflation.

The annual pace of price increases was the slowest in more than 50 years. The Labor Department said its closely watched Consumer Price Index dropped 0.7 percent after falling 1.7 percent in November — tumbling for a third straight month. Analysts polled by Reuters had forecast headline CPI dropping 0.9 percent in December.

Core prices, which exclude food and energy items, were flat for the second month in a row in December. That compared to analysts’ prediction for a 0.1 percent increase.

On a year-over-year basis, consumer prices rose 0.1 percent, braking from a 1.1 percent increase the prior month. It was the weakest reading since CPI fell 0.7 percent in December 1954.

Energy prices fell 8.3 percent in December, after declining 17 percent the prior month. Compared to the same period last year, energy prices fell a record 21.3 percent.

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.